Celsion (CLSN) - Odds of bankruptcy, Success and Date for "Make or Break" Cancer Drug Trial Results

CLSN is trading $7.22, down 7.4% with IV30™ up 6.5%. The LIVEVOL® Pro Summary is below.



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Celsion Corporation is an oncology drug development company focused on the development of treatments for those suffering with difficult to treat forms of cancer. As of December 31, 2011, the Company's product ThermoDox is being evaluated in a Phase III clinical trial for primary liver cancer (the HEAT study), a Phase II clinical trial for colorectal liver metastasis (CRLM) and a Phase II clinical trial for recurrent chest wall breast cancer.

This is a bio-tech note -- one with huge vol and some fascinating spreads and option pricing which lead to back of the envelope probability pricing. Let's start with the Charts Tab (one year) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



On the stock side we can see the massive run up of late pushing the stock above $7 as the implied rises. There is an interesting article on Seeking Alpha from which I have taken a little snippet:

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We are getting awfully close to January 2013 top-line release of "the Phase III HEAT Study, a multinational, double-blind, placebo-controlled, pivotal study of ThermoDox in combination with radiofrequency ablation (RFA) for the treatment of hepatocellular carcinoma (HCC), also known as primary liver cancer" -- the following 5 reasons additional reasons to be bullish now assume positive top-line results and what it means for shareholders.

Of course, all of this completely depends and anticipates top line data early next year being positive or the CLSN stock price will take a dramatic hit. This is a binary speculative event that could make or break CLSN. Make no mistake about it -- failure on the Phase III trials would cause CLSN to take a hit. Despite this very real risk, there are many reasons to be bullish.

Source: Seeking Alpha via yahoo! Finance; 5 More Reasons To Be Bullish On Celsion Now, written by Alex Heisenberg.
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Binary event is the key, with the second key being, we don't know exactly when in Jan we get the results. That means elevated vol (binary event) and a confused Skew from which we can draw our own probabilities in terms of best guess of release of data.

Let's turn to the Skew Tab, below.



We can see how elevated Jan and Feb are to Dec -- so the option market reflects a much greater likelihood that the event (binary news) comes out after Dec expiry. We can also see that Feb is elevated to Jan, so the option market reflects a greater likelihood that the news comes out after Jan expiry but inside Feb expiry.

Let's turn to the Options Tab and start putting some probabilities together -- both for date of news and probability of total collapse (bankruptcy).



Probability of Timing:
Jan vol is ~230%, and Feb vol is ~294%. A back of the envelope probability calculation would say the odds of the release of news in Jan are 230/(230 + 294) and, of course, the odds for Feb are 1 - P(Jan). So, in English, the option market reflects ~44% chance the news is out in Jan and 56% chance the news is out in Feb. Now, in all fairness, this has so many flaws in its logic I could write an entire blog on it -- but this is just quick math -- to get a feeling for the timing of this event.

Bottom line: The Skew tab clearly reflects that there is a greater likelihood that the event (binary news) occurs in Feb rather than Jan, but that there is some ambiguity.

We can also look to the Feb "disaster" puts ($1 strike). The mid-market value is ~$0.225. A sale at that price yields a max loss of $0.775. The max gain/max loss ratio gives us another back of the envelope result -- the odds are ~1/4 that the company goes bankrupt off of this news by Feb expiry. Again, there is an entire blog's worth of assumptions that are made here in using this methodology, but this is how we do it quickly on the floor.

Bottom line: There is a non-trivial chance that bad news means CLSN is no more.

Also interesting are some of the spreads on the board. I personally sold the Feb 2.5/2 put spread @ $.25. That makes a max loss / max gain of 1:1 (.25:.25). Back of the envelope, the price for that spread reflects a 50/50 chance that the company trades below $2. My trade (a sale of those odds) is a belief that the "real" odds are in fact lower (I sold a 50/50 chance). You can do this kind of analysis on literally hundreds of permutations.

For the very probability happy traders, you can do the same in a calendar spread and then make use both of the likelihood of news coming out in Jan expiry (or Feb) with strike prices and diagonals.

For what it's worth, the largest trade I see today is a purchase of the Feb 4.5/2 put spread for $1.55. That's obviously a bet to the downside.

The inarguable fact is that this news is huge for CLSN -- good or bad.  As always, I hope the company succeeds -- let's remember this isn't just a stock, it's a shot at curing cancer.

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